Mutual as the name suggests, is something, which is held in common or experienced or done by two or more parties. In the same way, our financial market has mutual fund (an investment vehicle), where pool of fund is collected from investors, to invest in various financial instruments like stocks, bonds and other money market instruments.
Most exotic part of mutual fund is that under an umbrella, an investor gets an entire array of various financial instruments, which is being managed by specialist, who invests the money in the market in order to produce capital gain and extra moolah for the investors. We know that without risk there is no gain. We need to take risk to gain, but definitely “calculated risk”.
So to lessen the risk factor, what is to be done?? The answer is diversification.
Diversification is one of the many edges, mutual fund has over other investment options, and other edge is fund being managed by the professionals. Other edge being, any class of investor can rest their green buck in mutual fund with investment starting from as low as Rs500.
MF is liquid, any investor can pull his money out any time, with small redemption fee and it also has tax advantage, as investor need not to pay any capital gain tax, if his investment is for more than a year.
Well, with so many advantages, mutual fund looks like a lucrative deal, but the catch is to choose the “RIGHT FUND” for you. All funds have their own characteristics and strategies running them, but an investor must know, what suits him the best and they can get help from stock market advisors. To choose from a long list of MFs available in the market can certainly be confounding task for an investor.
So, to start with, an investor must identify his investment objective, his time horizon and risk appetite to ultimately reach his investment goal. Once an investor is aware of his need he is already halfway through his journey. Now the investor can pick the best option for him.
To know the best, investor need to sieve the various available funds.
Which style and fund type to choose?
If an investor has long time horizon with fair risk taking capability, investor can put in funds which look for capital appreciation; however an investor with regular income requirement should invest in fund which has its holdings in dividend and interest paying stocks and bonds, respectively.
Once an investor knows which type of fund, he wishes to invest in, one must look for a fund house which has hold in financial market and has a track record of consistent performance.
Principal of consistency
Look at 5-10 years of performance, it will help to recognize whether MF is consistent or not. One must try and find a consistent fund.
Principal of Diversification
Check for the portfolio history of the fund from their website, to check whether the fund has maintained a well diversified portfolio.
Expenses occurred by the firm in terms of % of NAV. Lower the expense benefits the investor in the longer term.
Always check for entry and exit fee of the fund. Fees charged by the fund for entering the scheme and exiting the scheme before a specified time.
Selecting the CORRECT FUND, seems a daunting task isn’t it?? But after knowing your objective and with due diligence you will be closer to hit bull’s eye.
Wealth creation isn’t a t-20 match; it’s a test- match, which sometimes may not be won by swift 100 but certainly the game can be made with stay long and calm approach.